Brokers often lend customers’ shares to short-sellers. When you first open an account, there’s a chance that you automatically opt-in for such a program. If you have a Fidelity account, then you have a right to know if they have such a program in place by default. Well, do they?
Yes, Fidelity can and will lend your shares, but only if you have a margin account or you have enabled Level 3 and 4 permissions for options trading. You can ask them to remove you from the shared lending program or simply move from a margin to a cash account. The change will take effect in 3 to 5 business days, but it might downgrade your options trading permissions.
In this article, I will answer questions such as:
- The reason that Fidelity lends your shares and how it affects you,
- Whether you should ask them to stop doing that, and
- If you benefit by letting Fidelity lend your shares.
Sounds good? Let’s get started…
Simply put, Fidelity lends your shares because they make money.
Fidelity (like all brokers) will lend your purchased stocks to short sellers and charge them an interest rate as long as their short position is open.
First of all, don’t worry about the short seller defaulting if you have a Fidelity account. SIPC insurance guarantees that if such a thing happens, you won’t lose your shares.
The main problem with this practice is that short-selling a stock tends to bring its price down. When short sellers borrow shares of a stock, they immediately sell them in the open market, thus increasing the supply of that stock. Therefore, increases in supply naturally force the price of a stock down.
So, by letting Fidelity or any other broker for that matter lend a stock of yours to short sellers, you indirectly bring the price of your stock down. You basically act against your own interests, in fact…
As I already explained above, you act against your own interests when you allow Fidelity to lend your shares. But here’s the deal. It won’t make a huge difference if you opt out of the program. That is, you won’t stop contributing in pushing the price down much.
If you are an active trader planning on holding the stocks you buy for a short period, it may affect you more. But still, you will need to have a huge position to feel the difference.
So, if you opt out of this program, it will only be a matter of principle. That’s important, of course. If more and more people get informed that brokers lend their customers’ shares, this could have a more significant impact.
What I’m getting at is this. If you really need to keep having a margin account or advanced options trading permissions, then I don’t want you to think that this matters much when it comes to your individual situation. Rather, it’s a more broad issue that probably won’t concern you more than not having a margin account.
So it’s up to you whether you should stop Fidelity from lending your shares or not…
Another problem with Fidelity lending your shares is that unless you have more than $250,000 funded in your account and have opted-in for their Fully Paid Lending Program, you won’t be able to benefit from it. At the same time, this makes sense because you won’t lose your shares, so Fidelity takes all the risk.
So, to answer your question, you can’t benefit by allowing Fidelity to lend your shares. Their Fully Paid Lending Program, though, does bring some benefits.
Let’s now outline some of these benefits:
- You earn incremental income on a monthly basis that accrues with each day that passes
- Your positions don’t change which means that you still receive dividends on stocks that you lend and stand to gain from any upside movement of their prices
- You have online access to information regarding your securities that you lend, the interest rates that you earn, along with anything related to your portfolio valuations
Before you apply for this program, make sure you understand some implications though…
For starters, the interest rate will depend on how high the short-selling demand is. There’s also no SIPC protection if the short seller defaults on a stock of yours that Fidelity has lent them. At last, when you lend a stock, you don’t have any voting rights. To vote, you will have to stop lending it first.
As I told you, Fidelity does lend your shares, but only if you have a margin account or have enabled Level 3 and 4 options trading permissions. If you don’t want them to do this, you can opt out by simply moving to a cash account.
It’s important to know that Fidelity makes money from lending your shares because they give them to short sellers, but they take all the risk. However, by letting them do this, you allow short sellers to short the companies you have ownership in. Just keep this in mind if you don’t necessarily need a margin account and Level 3/4 options trading permissions.
Also, you should remember that there are no benefits to compensate for the issue mentioned above. Fidelity does not offer any benefits when you allow them to lend your shares to short sellers.
Did this article answer your question? If so, would you please share it with others? You can also ask me anything you want in the comments.
Thanks for reading and I’ll talk to you next time…
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